Pub 3148

Tips
Tip Tips
Tips

on

A Guide to
Tip Income Reporting
for Employees

Who Receive Tip Income

Department of the Treasury
Internal Revenue Service

w w w . i r s . g o v
Publication 3148 (Rev. 8-2006)
Catalog Number 26307C

If you work at a hair salon,

barber shop, casino, golf course,

airport, hotel, or perform cleaning,

food delivery, or taxi cab services,

and receive tips, this

guide is for you.

The tip income you receive as an employee from the services
such as those listed above — whether cash or included in a
charge — is taxable income. As taxable income, these tips are
subject to federal income tax, social security and Medicare
taxes, and may be subject to state income tax as well.
The Internal Revenue Service (IRS) has prepared this
guide to aid the employee who may need answers to tip
income reporting questions.

What tips do

I have to report?

Sometimes I don’t get tips directly
from customers, but rather from
another employee. Do I need to
report those tips?

Do I have to report all my tips to my
boss?
If you received $0.00 or more in tips
in any one month, you should report
all your tips to your employer so that
federal income tax, social security and
Medicare taxes, and maybe state in­
come tax can be withheld.

Yes. Employees who receive tips from
another employee are required to report
“tip-outs.” Employees often disburse
tips out of their earned tips to another
employee (tip-outs). Remember, all tips
are taxable income.

◆
Do I have to report all my tips on
my tax return?

◆
Do I have to report tip-outs that I
pay to other employees?

Yes. All tips are taxable income and
should be reported on your tax return.

No. You report to your employer only
the amount of tips you retain. However,
you must maintain records of tip-outs
with your other tip income (cash tips,
charged tips, split tips, tip pool).

◆
I was told that I had to report only a
certain percentage of my total sales
as tips. Is this true?
No. You must report to your employer
all (100%) tips you receive, except for
the tips from any month that do not
total at least $0.00.



What records

do I need to keep?

What type of records do I have to
keep?
You must keep a running daily log of all
your tip income. You can use Publica­
tion 144, Employee’s Daily Record of
Tips and Report to Employer, to record
your tip income for one year. Publica­
tion 144 includes Form 4070, Employ­
ee’s Report of Tips to Employer, and
Form 4070A, Employee’s Daily Record of
Tips. These forms have spacing for you
to log your name, the employer’s name
and address, date tips were received,
date of entry, tips received, tips paid out,
and name of employee paid. Your daily
log would be your best proof should
your income tax return be questioned.
For a free copy of Publication 144, call
the IRS at 1-800-89-676.

◆
What can happen if I do not keep a
record of my tips?

If I report all my tips to my
employer, do I still have to keep
records?
Yes. You should keep a daily log of your
tips so that in case of an examination,
you can substantiate the actual amount
of tips received. There are a number of
reasons why you might need records:
■ Your

return could be randomly
selected for a federal income tax
examination.
For example: Your Form 1040, U.S.
Individual Income Tax Return, estab­
lishes that you have your own home,
two cars, and three exemptions, and
your Form W- shows that you earned
only $10,000 in income. In this sce­
nario, an examination may occur if
the examiner determines that income
may have been underreported.
■A

tip examiner could review your
employer’s books and records. The
examination could reveal unreported tip
income that you may later need to verify.

If it is determined in an examination
that you underreported your tip income,
the IRS will assess the taxes you owe
based on the best available records of
your employer. Tip income adds up.
Underreporting could result in you
owing substantial taxes, penalties, and
interest.

■ An

Internal Revenue Service Center
may run a match of your income in­
formation from your Form 1040, U.S.
Individual Income Tax Return, with the
income information from your Form
W-. If these figures do not match, you
could receive a notice about the discrep­
ancy and a possible examination of your
tax return.



How does this affect my

income tax filing?

I forgot to report my tip income to
my employer, but I remembered to
record it on my federal income tax
return. Will that present a prob­
lem?

What can happen if I don’t report
my tips to the IRS?
If the IRS determines through an ex­
amination that you underreported your
tips, you could be subject to additional
federal income tax, social security and
Medicare taxes, and maybe state in­
come tax. Also, a penalty of 50% of the
additional social security and Medicare
taxes, and a negligence penalty of 0%
of the additional income tax, plus inter­
est, may apply.

If you do not report your tip income to
your employer, but you do record the tip
income on your federal income tax re­
turn, you may owe a 50% social security
and Medicare tax penalty and be sub­
ject to a negligence penalty and possibly
an estimated tax penalty. When you do
not report your tips to your employer, it
places your employer at risk of possible
assessment of the employer’s share of
social security and Medicare taxes.

◆
What’s in it for me if I report all my
tip income?

◆

There are many good reasons why you
want to report all your tip income:

If I report all my tips but my taxes
on the tips are greater than my pay
from my employer, how do I pay
the remaining taxes?

■ Increased

income may improve fi­
nancing approval when applying for
larger loan amounts (mortgage, car,
and other loans)

You can either pay the tax when you file
your federal income tax return or you
can reach into your tip money and give
some to your employer to be applied to
those under-withheld taxes. The em­
ployer will then record these taxes and
you will get credit on your Form W-. If
you wait to pay when you file your tax
return, you may be subject to an esti­
mated tax penalty.

■ Increased

worker’s compensation
benefits, should you get hurt on the job
■ Increased

unemployment compensa­
tion benefits
■ Increased

social security and Medi­
care benefits (the more you pay, the
greater your benefits)
■ Increased

employee pension, annuity,
or 401(k) participation
■ Check

with your employer for other
increased benefits (based on pay) that
your company may offer, such as life
insurance, disability payments, and the
right to purchase stock options
■ Compliance

4

with the tax law

Is tip reporting unique to a

specific industry?

Does tip income reporting apply
only to employees in a specific
industry?

Why has tip reporting become such
an issue?
To report all tip income has always
been the law. The IRS has put greater
emphasis on reporting tip income
over the past few years because a sig­
nificant number of taxpayers are
not reporting all their tip earnings as
taxable income.

No. Anyone who receives tip income
is required by law to report it to his or
her employer. The Tip Rate Determina­
tion/Education Program (TRD/EP) was
first promoted in the gaming industry
(casino industry) in Las Vegas, Nevada,
and subsequently to the food and bev­
erage industry. Other individuals that
receive tip income include airport sky­
caps, bartenders, hair stylists, bellhops,
casino workers, delivery service people,
golf caddies, hotel housekeepers, mani­
curists, masseuses, parking attendants,
railroad redcaps, and taxi drivers.

◆
Why should I report my tips to my
employer?
When you report your tip income to
your employer, the employer is required
to withhold federal income taxes, social
security and Medicare taxes, and maybe
state income tax.
Tip reporting may increase your social
security credits resulting in greater
social security and Medicare benefits
when you retire. Tip reporting may
also increase other benefits to which
you may become entitled, such as un­
employment benefits, worker’s com­
pensation, or retirement benefits. Addi­
tionally, a greater income may improve
financing approval for mortgage, car,
and other loans.

5

What is this compliance

program I’ve heard about?

My employer has entered into a
compliance agreement with the
IRS concerning tips. What is this?

TRDA–What is my responsibility,
as an employee, under the Tip Rate
Determination Agreement?

The Tip Rate Determination/Education
Program was developed in 199 to help
those employees receiving tip income
and their employers understand the
laws on reporting tip income. Under
this program, and depending on your
specific business, your employer may
enter into one of two arrangements —
the Tip Rate Determination Agreement
(TRDA) or the Tip Reporting Alternative
Commitment (TRAC) (created in June
1995). Ask your employer for more
information about this program.

You are required to file your federal
tax returns. You may be asked to sign a
Tipped Employee Participation
Agreement proclaiming that you are
participating in the program. The
employer, as a participant in the TRDA,
has agreed with the IRS to a tip rate for
the employer’s establishment. To stay a
participating employee, you must report
tips at or above the tip rate determined
by the agreement. Furthermore, as part
of the TRDA arrangement, the employer
is required to report your name, social
security number, the hours worked or
sales made, your job classification, and
your reported tips to the IRS if you do
not report tips at or above the deter­
mined tip rate.

Currently, the TRDA is only available to
the food and beverage industry and the
gaming (casino) industry.
At this time, TRAC is open to the food
and beverage industry and the hair
styling industry. Ask your employer for
more information about this arrange­
ment as it may be extended to other
industries where tipping is customary.

6

Indirectly-tipped employee:
■ You are required to report all your
tips to your employer. If the establish­
ment has the directly-tipped employee
provide the name and amount of tips
shared with you, the establishment
could provide you with a statement of
tips that you would need to verify or
correct.

TRAC–What is my responsibility, as
an employee, under the Tip Report­
ing Alternative Commitment?
Directly-tipped employee:
■ Your employer will furnish you with
a written statement (at least monthly)
reflecting your charged tips
You are to verify or correct this state­
ment
■

You are to indicate the amount of cash
tips received
■

■ When

reporting your cash tips, you
should remember that there is a cor­
relation between charged tips and cash
tips.
(Your employer may be able to inform
you of the establishment’s charged sales
to cash sales ratio. For example, if the
establishment is 50% charge and 50%
cash, and you received and reported
$100 in tips on charged receipts, it is
reasonable to believe that you should be
reporting close to $100 in cash tips.)
You may be asked to provide the
name and amount of any tip-outs to
indirectly-tipped employees.
■

7

T

he IRS provides the following publications
and forms relating to tip income reporting.
These products can be downloaded from the
IRS Web site at www.irs.ustreas.gov and
ordered through the IRS by dialing
1-800-89-676. (TTY/TDD equipment access,
dial 1-800-89-4059)
Pub 505 - Tax Withholding and Estimated Tax
Pub 531 - Reporting Tip Income
Pub 1244 - Employee’s Daily Record of Tips and Report
to Employer. This publication includes Form 4070,
Employee’s Report of Tips to Employer, and Form 4070A,
Employee’s Daily Record of Tips.
Form 1040ES - Estimated Tax for Individuals
Form 4137 - Social Security and Medicare Tax on Unre­
ported Tip Income

8

Tips Tips
on

A Guide to
Tip Income Reporting
for Employees
Who Receive Tip Income

Department of the Treasury
Internal Revenue Service

w w w . i r s . g o v
Publication 3148 (Rev. 8-2006)

Catalog Number 26307C